Joshua Shapiro
Joshua Shapiro
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The Fed isn't going to get exited about inflation in the labor market. At this stage they are focusing on core inflation at the consumer level and growth. Certainly, the news lately on the growth side has been quite good.
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The Fed is not going to raise rates right away, even if the March numbers are really strong. They are going to wait until they get several months of very strong numbers, and for people to start really feeling that the labor market is improving before they raise rates.
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The big question now is how much companies will be able to raise prices for finished products to offset the hit to profits from higher unit labor costs.
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The national labor market numbers are being skewered by the hurricanes at the moment and it's going to be a few months before we get a clean read.
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In general, consumers seem to be taking the view, at least initially, that higher energy costs will not disappear anytime soon and that they are likely to take a toll on the economy as a whole and on labor markets in particular.
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If you get a big number next week, people will say great, the labor market is finally recovering, this is the last piece in the economic recovery, ... But they'll also say, well maybe now the Federal Reserve will raise interest rates sooner.
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We believe that consumer spending is going to bear the brunt of higher energy prices that we have seen leading up to and immediately following Hurricane Katrina as discretionary spending is curtailed.
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Refinery shutdowns will have a big impact on gasoline prices, ... and that's a tax on consumers.
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Our own belief remains that while core inflation could well inch up in the coming months, it is unlikely to accelerate significantly.
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I think they are trying to say that they can still do their tightening 25 basis points at a time, but they still have a long way to go in raising rates. Essentially, the message is, 'if you think we're nearly done, think again'.
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We continue to expect the Fed funds target to reach 5 percent in the second quarter of next year, which is where we see the tightening process ending. Comments from Fed officials suggest that they expect only a temporary hit to growth from higher energy prices, while concern about a drift up in core inflation is increasing.
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While we have seen an increase today versus a forecasted decline, housing starts are currently doing on a trend basis what many have forecasted: remaining on a high plateau, unable to move higher but not seeing demand fall off enough to take starts lower.
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It's going to be hard in the near term to do anything more than slow the rate of deterioration in the deficit. Imports are just too large compared with exports.
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It sounds like he's sort of reaffirming what a lot of the Fed officials have been saying, which is that they are more worried about inflation than slowing growth,